primary objective of financial accounting

primary objective of financial accounting

The Significance and Primary Objectives of Financial Accounting

1. Introduction to Financial Accounting

The needs for financial accounting information have also increased greatly with business activity. Proof of such enhancement can be seen by examining the development of the elements of financial statements to include such current innovative liabilities as price-level adjusted reserves and deferred taxes. The entities that consume this information in today’s open market environment include shareholders – the ultimate entrepreneurs who bear the risks, reap the rewards, and surrender control; investors; bankers; security analysts; mutual fund investors; governmental authorities; employees and unions; attorneys; and educator groups. Because they have different project objectives, they require various information.

Financial accounting has often been called “the language of business.” And why? A precise analogy exists between business and the communication process, the preparation of financial statements, and the dissemination of financial information to the various users. Just as individuals and groups in different nations obtain important and relevant information from foreign languages by translating them into their native tongues, so the various users of financial statements use economic or financial information of the enterprise by translating it into the financial statements. The financial statements report (translate) past events of the enterprise, while budget and projection programs report (translate) future operations.

1.1 Importance of Financial Accounting

2. The Primary Objectives of Financial Accounting

In summary, financial accounting aims to summarize the transactions of the company and offers a picture connected with the financial performance of the company, and transferring essential information to the users in order to assist them to make well-informed judgments.

(1) The whole process of accounting revolves around the basic purpose of maintaining systematic and permanent records of all the business transactions in the books of accounts so that the final accounts of the business can ultimately be prepared. The records of accounting are not maintained with a view to being exhibited to the outsider world, but are intended for use by management in its day-to-day work of managing the business. (2) Providing information for decision-making. Information for planning and control which facilitates the selection of profits and services for particular functions. Information which will be helpful to owners and others. The basis of financial accounting is about both recording business transactions and presenting the financial statements to people who are interested in the financial health of the company and the company’s profitability ability.

The following are considered to be the primary objectives of accounting:

3. Key Principles and Concepts in Financial Accounting

3. Historical or Historical Cost: The value to be shown in the financial statements of goods and assets realized (owned) should be historical cost, if this has not changed due to the economic events after the supply date. Elderly assets (and goods and assets that have become mnemonics) in a company show the cash and cash equivalents as cash and cash that can be liquidated quickly. The cost of purchased goods is shown in inventories at the lower of the cost and the market value. The organization entity puts all the effects of the fanatic agreements in inventories of future cost rather than the cost of goods sold. This is the underlying tenant of the concept of finance.

2. Consistency: If one accounting period follows immediately after the preceding period, profits and losses must be the same whether the financial statements for the two periods are drawn up according to the same principles or not.

1. Accruals: Financial statements are drawn up according to market values, i.e. they are prepared on the basis of financial transactions carried out during each accounting period in the framework of the going concern, costs and time-period precepts. This mainly refers to sales. However, for the sake of comparison, the costs of goods sold are drawn up in such a way that they cost the company as goods are sold as far as possible.

4. Role of Financial Accounting in Decision-Making

The efficient flow of capital is essential to the implementation of any national plan, and investment in capital goods will determine the economic growth of a country. The investor who places his savings at the disposal of industry does so in the expectation of receiving a return from his investment as a reward for forfeiting spending the funds. The ultimate success or failure of an enterprise determines to a great extent the degree of satisfaction received by the investor, and this result is influenced by the stewardship of management. Only with the flow of financial information interpretation through the medium of financial accounting is anything approaching an informed choice of investment possible. Financial accounting as a discipline is concerned with the accumulation, retrieval, and statistical articulation of the business transactions of a business: a business being taken to include non-profit seeking organizations, and includes the function of classifying, summarizing, interpreting, and communicating the business transactions of an accounting entity in order that the users of the information may achieve an understanding of its liquidity and solvency. The financial stability of a business and its operational results are of interest to a large number of parties. The users of financial accounting information include proprietors who have an interest in the continued solvency and liquidity of a business, creditors who wish to be assured that debts are secure, employees who rely on the continued existence of their jobs, management who requires the facts upon which to base its decisions, and the general community. Non-proprietary users frequently have a dependence upon the privilege of limited liability.

Financial accounting is important because it is the channel through which financial information is made available to parties outside the business, and because it is the traditional and still most frequently used reporting process. As most investable funds within an economy are placed at the disposal of external companies by capital market institutions such as banks, life assurance offices, pension funds, government ministries, and management of other companies, preparation of the information (without which these funds would not be made available) would appear to be worthy of consideration as a social service. As the capital markets are relatively highly developed and represent some four-fifths of the financial and business structure in the United Kingdom, the traditional role of the accountant’s practice—producing the facts upon which investors, tax authorities, and other government bodies may rely—translates into one of considerable social significance.

5. Conclusion and Future Trends in Financial Accounting

It has been widely accepted that accounting requires intuition and estimation to measure the composition and quality of accounting items. The high-quality data (be accurate, reliable and related to rational concepts) have been promoted to affluent economic, social and demographic communities because of the tremendous significance of accounting information in evaluations. The consensus that quality accounting can be established through the reflection of the postulates and objectives described in financial accounting standards as well as in the general purpose of financial reports is growing. Although analytical accounting in the twentieth century is primarily based on the postulates of objectivity, cost and fund realization, no one can guarantee that the content of financial statements reflects the management’s decisions. It is difficult to obtain full measures prescribed in a set of financial accounting reports as the measures will not be all-inclusive and incomplete resulting in a loss of information which may also be misleading. The biased measures may not help in decision-making because of accounting conservatism. The measures duly verified become abstract and difficult to understand and handle. It is even difficult to recognize whether profit reported on income is true economic income. Therefore, it is impossible to satisfy the economic needs of an individual. But can professional managers believe that accounting information could affect their actions, information which may be unpersuasive, unconvincing and most often may be irrelevant? That is why Sir David Tweedie, the chairman of the International Accounting Standards Board, has said that he thought the most important factor in setting accounting standards was to understand which users needed which information, and that it was also unnecessary to force all users to deal with the data beyond that need. Therefore, it is generally acceptable that judgment plays a key role to influence managers when the firm is confronted with uncertainty. The ferret has to be quick and timely, and attribute value to accounting information at its appropriate subjective level if decisions are to be taken on time. The accounting principle should be perceived as one of the norms set in order to assist the judgmental area.

It is evident that the main objectives of financial accounting are of primary importance both to the producers and users of financial statements. The objectives commonly recognized by those accounting professionals concerned with financial accounting are crucial to the development of qualitative decision-useful information. These objectives are formulated in a wide range of concepts linked to the quality of accounting data and enable all concerned to have access to economic and legal information to assess how professional managers perform their duties. Although financial accounting in the future has been forecast to be based primarily on the concept of value rather than historical cost valuation, it is significant to note that the entire framework of accounting is designed solely to assist users to make decisions and to prevent risks. The hypothesis that decisions are taken based on the expertise or intuition of people is not a particularly clear concept of how accounting assists these users in the valuation process.